Filing bankruptcy is a big decision.  Most of the time people are so overwhelmed with their financial burden that actually speaking to a bankruptcy services attorney is a painful process. These problems may be the effect of their “I need money now” attitude. To make matters worse, there are quite a few myths floating around concerning the rules and guidelines in Chapter 7 bankruptcy cases.

What possessions people can keep

One of the first things that people hear when they begin pondering a Chapter 7 filing is that they will have to give up their home, cars and all of their possessions.  This is a very broad interpretation of the laws.  For example, a home does not have to be automatically surrendered.  In fact, if the mortgage on the home is more than the current property’s value, the home will not even be considered.  Normally, this would be the case in which the home owner is upside down in their loan.  However, given the current state of the economy and the housing market, this may be a prime opportunity to consider declaring yourself bankrupt.

Cars may be retained by the borrower as long as the value of the car is not greater than the allowable amount.  A competent attorney can explain how the value is determined as well as the limits placed by the court.

Items that have to be given up

In many cases, precious collector items are indeed surrendered to be sold in an effort to pay the debt.  Examples of these types of assets could be stamp or coin collections, cash, current bank accounts, and second homes.  These are the types of items that are considered luxuries rather than necessities.  The law allows people to retain necessary items such as clothing, appliances, and household furniture.  The purpose of the law is to negotiate a compromise between the debtor and the creditors, not to put people in the street and leave them without clothing.

New Means Test

The main benefit of the Chapter 7 plan is the revised means test.  This test compares a person’s current income with normal monthly living expenses.  Once this calculation is completed any unsecured debts that are above the “means” test can be discharged.  Unsecured debts are items such as medical bills, credit cards, unsecured loans from finance companies and prior tax bills.

People should avoid borrowing against the equity in their home or any available retirement funds before seeking legal counselor.  A competent attorney will look at all of the assets available to a person and design a course of action.  Having a third party look at the situation and review the facts is a much better proposal than making choices based on fear and stress.